Kay report calls for realignment of executive remuneration

A report commissioned by the government has proposed to realign company incentives by better relating directors’ remuneration to long-term sustainable business performance.

The report, UK equity markets and long-term decision making, has also proposed that long-term performance incentives should be provided only in the form of company shares, to be held at least until after the executive has retired from the organisation.

The report is the result of an independent review by John Kay, professor at the London School of Economics, to examine investment in UK equity markets and its impact on the long-term performance and governance of UK organisations. It was commissioned by business secretary Vince Cable in June 2011.

The report notes, as background, that pension funds have had a changing role in equity markets. It states that, more recently, regulation of pension and life funds and the maturity of pension funds, has led both pension trustees and insurers to reduce their exposure to equity markets.

In the executive summary, Kay concludes that: “Short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.”

Business secretary Vince Cable added: “This is an insightful and powerful review, which describes vividly the flaws of the UK’s financial markets and their relationships with investors and businesses.

“Since becoming business secretary, I have been a vocal advocate for a new model of responsible capitalism based on creating long-term value rather than short-term profit.

“Equity markets have a vital part to play in ensuring we have well-run companies providing sustainable returns for investors. This report is an important and timely contribution to the discussion of how we achieve this.

“Professor Kay has set out his clear vision for a way forward, with recommendations for government and others, and I will consider these in depth and look forward to responding in detail later this year.”

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